Last week’s report of an unexpected deterioration in our terms of trade adds a further and unwelcome twist to an already distressing story – the damage being done to our productive sector by an overvalued dollar.

The recent admission by the new Governor of the Reserve Bank, Graeme Wheeler, that the dollar is overvalued is welcome evidence that the issue is at last attracting the attention of our policymakers – and so, too, is the suggestion that the Reserve Bank might restrain bank lending for the purposes of house purchase.

But we have lived with an overvalued currency for so long that we no longer have a proper base mark by which to measure it. What we can do, however, to establish whether the dollar is overvalued is to ask what we might expect to see in an economy that has been fundamentally uncompetitive over a long period.

The answer is that such an economy would exhibit slow rates of growth, high unemployment, low rates of investment and productivity growth, persistent trade deficits, a perennial need to borrow overseas, a propensity to sell off assets – including national assets – into foreign ownership, high levels of import penetration, a weak export sector, and low rates of return on investment and therefore of profitability.

Sound familiar? If we do not immediately recognise these characteristics as the hallmarks of New Zealand’s economic performance, it is only because of the resolute refusal of our policymakers to think about our loss of competitiveness, let alone do something about it.

We are not alone in this refusal. Many western countries are reluctant to recognise that the world has changed and that many developing countries are becoming, or have already become, more competitive than we are.

Yet to ignore our competitiveness problem is to invalidate the whole of our economic policy. It leads us to pay excessive attention to inflation, so that we slam the brakes on at the slightest hint of inflation re-appearing, because our unacknowledged lack of competitiveness makes us rightly fearful of any increase in our costs.

It means that we dare not – even in a long drawn-out recession – stimulate the economy so as to bring down unemployment, restore public services, reduce the government deficit through buoyant tax revenues and resume a sustainable rate of growth because we know that any growth will simply suck in more imports, worsen our balance of trade and increase our need to borrow. If we were competitive, we could afford to stimulate the economy because the growth would come in the form of exports and investment, not consumption and imports.

It means that – as all the signs confirm – any recovery from recession will lead us straight back to an overheated Auckland housing market and an import orgy.

It encourages the delusion that we can somehow improve productivity in a vacuum and that a few more ministerial speeches about it will do the trick. We do not grasp that productivity improvements are a function of competitiveness, not the other way round.

Most worryingly, our determination not to recognise our competitiveness problem means that we (or at least our government) are – apparently without a care in the world – destroying our future by selling off our productive capacity to foreign owners. The loss of those income streams makes our lack of competitiveness even worse and handicaps our ability to do anything about it.

And there is another – hitherto unrecognised – aspect of that blind spot on competitiveness that reflects not just ignorance or carelessness but, perhaps, a deliberate bias in favour of the “haves” as opposed to the “have nots” – an aspect that could be an important factor in New Zealand’s widening inequality gap.

The most obvious remedy for an economy-wide lack of competitiveness is to reduce our costs across the board through bringing down the value of the dollar. That would require everyone to make a fair and shared short-term contribution to the solution of our problems while providing a solid basis for future growth.

But our policymakers are reluctant to ask the better-off to make that contribution. They seem to be quite relaxed about workers losing their jobs and beneficiaries being targeted. They are quite prepared to force wages down by reducing workers’ rights at work and lowering, in real terms, the floor placed under wages by the minimum wage.

But they draw the line at a devaluation of the currency that, as part of the effort to reduce our costs, would have the immediate effect of reducing the value, in international terms, of financial assets, and would therefore impose a cost on the holders of those assets, and on financial institutions and banks.

They are asking, in other words, wage-earners to bear the whole burden of improving our competitiveness, while protecting the value of the assets held by the wealthy. Sadly, such a policy is doomed to fail in terms of improving our competitiveness; but it will certainly be effective in widening the already damaging gap between rich and poor.

New Zealand has always been somewhat unusual in economic terms. With our emphasis on agriculture and primary produce – the characteristic most often of undeveloped economies – we nevertheless succeeded in achieving a high standard of living, to the point where – in the 1950s – we enjoyed one of the highest living standards in the world.

In those days, however, our economy had a certain balance. Small as we were, we were not only efficient primary producers but had developed a manufacturing base that met a reasonable proportion of our needs and a service and retailing sector that was responsive to local control. Able to pay our own way, with an economy that was competitive across the board, we could look the world in the eye.

Since that time, however, the picture has dimmed. As we have been absorbed more and more into a global economy, international competitiveness has mattered more and more, and our small size and remoteness have counted increasingly against us. We were not helped of course by fundamental changes in our trading patterns, such as the UK’s entry into the European Common Market.

In any uncompetitive economy, the less competitive parts struggle and eventually disappear. Ever larger parts of our economy – like manufacturing – have found the going tough, and have the felt the pressure of having to compete with more efficient and lower-cost producers elsewhere. Only the most efficient sectors – in comparative terms – survive. An uncompetitive economy like ours becomes as a consequence more and more dependent on those fewer and fewer sectors that can compete in international terms – and in our case, that means primary produce, and even more specifically, dairy produce.

We have chosen, however, not to recognise the remorseless economic logic that underpins these developments. We have behaved as though – as a total economy and not just in terms of rapidly shrinking proportions of it – we are highly competitive. We have cheerfully entered into free trade arrangements with all and sundry, including the most powerful and efficient economies in the world, apparently confident that we can take them on across the board without suffering damage to our own productive sectors.

Worse, we have quite deliberately set about making the problem more serious. We knowingly pursue policies that – through offering an interest rate premium to anyone who will lend us money – drive up our exchange rate, which immediately makes our lack of competitiveness much worse.

We then avert our gaze from the consequences of these policies. As though a perennial balance of trade deficit, a huge private sector borrowing requirement needed just to keep our heads above water, and the pressing need to sell off more of our assets to foreign owners than any other advanced country are not enough, we still blithely tell ourselves that we are doing well and that our economy is in good shape.

As large parts of our economy cease to exist, our Pollyanna Prime Minister denies that there is a crisis in manufacturing; yet manufacturing jobs, manufacturing output, the balance of trade in manufactures, are undeniably all in a bad way. He does not seem to be aware – and if he is – seems not to care, that manufacturing’s share of our economy has fallen from 26% in 1972 to just 12% by 2009, and will have fallen substantially since. Even those parts of our manufacturing economy that do survive – Fisher and Paykel Appliances, for example – are being sold off to foreign owners.

Does the manufacturing crisis matter? Yes, it does, not just because of the lost output, the loss of jobs, and the increased burden on our balance of payments, but because all evidence shows that successful modern economies build their success on efficient manufacturing.

Manufacturing is the most important source of innovation, the most substantial creator of new jobs, the most effective stimulus to improved productivity and offers the quickest return on investment. Almost without exception, economies that have given up on manufacturing have struggled and have discovered that supposed substitutes are either castles built on sand, as in the case of the UK’s financial services industry, or deliver their benefits to only a small part of the economy, as in the case of Australia’s mining industry.

By contrast, the world’s new economic powers – China, India, Japan, Korea – have built their strength on manufacturing, while the strongest of the longer established economies – Germany – continues to do likewise.

We, however, tell ourselves that competitiveness is not something we need worry about. We wave goodbye to manufacturing with nary a care, and expect dairying alone to carry the burden of guaranteeing our prosperity into the future.

But our competitive advantage in dairying is already being eroded as well. We are already treading the familiar path of selling off large chunks of our productive capacity and expertise in dairying to potentially powerful competitors and we have taken the first fateful steps in selling ­vital income streams from dairying to foreign owners. When dairying has followed manufacturing into decline, what will we do then to pay our way?

I was for a time the Shadow Secretary for Trade and Industry in the British Shadow Cabinet and, in that capacity, I frequently met business leaders. I was often surprised at how little they knew about the world beyond their businesses.

So lacking in confidence on this score were some of them that they made some young friends of mine very rich by paying them large sums of money for the privilege of being introduced to supposedly important people who would have been happy to meet them anyway.

All this is of course in marked contrast to today’s conventional wisdom that businessmen (and it usually is men) are the only people who are competent to decide almost anything. It is assumed not only that they know about business but that their business skills are essential for the resolution of otherwise difficult issues in every sphere of activity.

It is not that they are assumed to know everything – far from it. It is just that they are believed to know all – little though it is – that is necessary.

I was reminded of this by last week’s report that ambassadorial posts are to be advertised with a view to opening them up to a kind of competitive process. It is apparently no longer enough to graduate with a good degree and to be accepted against strong competition into the diplomatic service, to have gained years of experience and to have developed special knowledge and skills in foreign languages and international politics, and to have spent a good part of one’s life serving one’s country in sometimes difficult and even dangerous posts overseas.

These qualities are not what we are now looking for. Anyone, it seems, can be a diplomat. Careful analysis, subtle judgment, accurate reporting, the ability to gain the confidence of people of different cultures and politics, are all beside the point. What is needed instead, apparently, is the ability to focus on the bottom line, to secure a proper return on capital, to cut costs and generally to bring the sharp lash of business realism to bear.

I am a former diplomat myself and it may be thought that I am reading too much into this; but I can think of better ways of maintaining professional standards and morale if we want an effective diplomatic service. The Americans have for many years of course treated an ambassadorial post as a quid pro quo for financial contributions to political campaigns – and much good it has done them.

But it is not just the diplomatic service that is in the firing line; it is only the latest bastion to fall to the cult of the omniscient businessman. From public service broadcasting to running prisons, from providing health care to protecting the environment, there is virtually no aspect of our national life that would not benefit, it seems, from being run as though it were a business. We scarcely have a public service any longer, so numerous are the highly-paid consultants who now compete for the work.

Everything must be justified on purely business grounds. We are no longer citizens, but (if we’re lucky) shareholders – no longer people, but units of production. Workers in any case do not count; the business people we are invited to lionise do not include those who merely work for a living, since it is making money, not earning a living, that is held up as the pinnacle of achievement.

Who cares whether there is any understanding of the complexities of conducting foreign relations, or of providing justice to the victims of the Pyke River disaster, or of the value of a national broadcaster in underpinning and helping to shape our own national identity? Who bothers with social, cultural and environmental goals, when everything revolves around the short-term return on financial investment? The only people who need to be satisfied are the accountants; the only measure that matters is the bottom line; nothing else is of value.

We see the syndrome at its most virulent in the constant assertion that our economy must be run as though the country is a business. It follows that businessmen alone are equipped to make the important decisions. Nothing could be further from the truth.

In hard times, a business will survive by cutting costs, laying off workers, suspending investment plans, delaying paying bills – the whole gamut of self-preservation measures. These are all sensible measures for a single business to take in its own interests. An economy that responds in this way, however, will drive itself into recession.

Yet, so entrenched is the conviction that businessmen know best, that we continue to listen to individual business leaders who solemnly assure us that, in a recession, retrenchment is what the economy as a whole must pursue.

No one can doubt that enterprising and successful business people are critical to our national future. Let us ensure that they are encouraged and helped to concentrate on what they are good at (and that they get better at it). But let us also recognise that there are many other facets of a healthy and happy society that do not lend themselves easily to the nostrums provided by the business manuals.

What’s not to like about free trade? Trade is obviously a good thing, and free trade must surely be better than the alternative? So convinced are New Zealanders of its merits that the “free trade” label need only be attached to this week’s talks about a Trans Pacific Partnership to persuade us that a successful conclusion would be an unalloyed blessing. Yet the actual basis for this touching faith has almost never been debated.
Ever since British membership of what was then the Common Market ended well over a century of managed trade, and Rogernomic fervour persuaded us that the “free” market would always produce the best results, it has been an article of faith in this country that free trade is the only way to go. Yet other developing countries (and who is to say we are not one?) have almost always seen the advantages of protecting nascent and vulnerable industries against the full force of competition from more powerful economies.
We, however, have approached the global marketplace as a child would a candy store. With astonishing naivety, we have optimistically and often unilaterally removed tariff and other trade barriers, confident that our trading partners would also one day see the light, and that our tiny and vulnerable economy could in any case prosper in direct competition with some of the largest and most efficient economies in the world.
Each new step towards free trade nirvana is celebrated and justified by pointing to the increased exports that increased free trade will bring. No matter that our trading partners only buy our goods because they want them – and in a world short of food that is likely to become even truer, as witness the proprietorial interest the Chinese are showing in our dairy industry.
No matter that the claimed increase in exports seems to owe little to the presence or absence of a free trade agreement. The sharp rise in our exports to China, for example, had already happened before our free trade agreement had time to take effect this year.And no matter that, in virtually every case, the increase in exports has been more than offset by a sharp increase in imports, with consequent damage and in some cases actual destruction of domestic industries. We are so dazzled by the prospects of export growth that we are ready to take any risk and make any concession.
If free trade were really as beneficial as is claimed, why have we endured our perennial trade imbalance over such a long period? And do we understand that free trade arrangements are not just about trade, but are really designed to produce an integration of economies?
A free trade arrangement operates very much like a single economy. If the whole of the combined market can be accessed without any restriction from any point within it, why would anyone manufacture anywhere else but the most populous part of the market and the most efficient or low-cost manufacturing centre?
That invariably produces a concentration of skills, resources and capital in the most efficient parts of the single market, and that does not usually include small marginal economies like New Zealand – just ask the Greeks or Irish or Portuguese.
And it is not just tariffs that have to be aligned. Anything that could be argued to upset the “level playing field” will not be allowed. As others have discovered before us, a free trade agreement with the United States, for example, would mean that our cooperative marketing of dairy products or kiwifruit through a “single desk” like Fonterra or Zespri would be targeted as an unacceptable distortion of trade.
A monopsonistic purchaser like Pharmac, which has saved us millions of dollars, would be attacked as inimical to the “free” market that the major pharmaceutical companies would want to exploit. And across the board, any attempt to give priority to local suppliers would be outlawed.
If the Trans Pacific Partnership follows, as American “free traders” have assured us it will, the model provided by the North American Free Trade Agreement, there are yet more far-reaching consequences in store. A NAFTA-style arrangement would give individual companies the power to enforce rights against our government in specially constituted international tribunals, even if those rights were not available to our own firms.
This is an international agreement of an unusual type – one where individual corporations have the same rights as governments. Those rights could include exemptions from domestic obligations in fields like health and safety, or concessions on tax treatment, or preferential treatment when it comes to awarding contracts, or relief from attempts to protect the local ownership of assets. Even if our own government – perhaps a government of the future – wished to change domestic law in these respects, foreign corporations could still enforce their rights under the “free trade” agreement.
There is no reason why a sensible trading relationship should not benefit both parties. There are many situations where free trade is appropriate. But we would be foolish to go on, as we have done for 25 years, taking on trust that the “free trade “ label is the only safeguard we need.
Bryan Gould
5 December 2010
This article was published in the NZ Herald on 7 December.